Morales Nationalizes Bolivia's Oil, Gas!

Morales ordered soldiers to occupy Bolivia's natural gas fields and the president threatened to throw out foreign companies unless they agree to new contracts within six months giving the state control of energy production. [!!!]

"The time has come, the awaited day, a historic day in which Bolivia retakes absolutely control of its natural resources," Morales declared in a speech from the San Alberto petroleum field in southern Bolivia.

Negotiations are to begin immediately with affected firms, mostly from European and other South American countries. The move should not affect US energy prices because the United States is not a major consumer of Bolivian natural gas or oil, specialists said.

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The Bolivian government's plan appeared to be less of an outright takeover of foreign assets than a mandatory sale of most assets to the government energy concern. Morales has indicated a willingness to allow some foreign companies to remain as minority shareholders under his new terms.

Bolivia has the continent's second-largest natural gas reserves, after Venezuela, but most of its capacity remains untapped because of a lack of infrastructure and investment. Much of its gas is sold to Brazil and Argentina. Petroleum production is less significant.

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It remained unclear where Bolivia would secure the funds to purchase the private assets for its state energy concern, Yacimientos Petroliferos Fiscales Bolivianos, and how much the government would be willing to pay -- market value or a price dictated by the Bolivian government.

"The big question is where the money is going to come from, and, who will set the prices," said Eduardo Gamarra, a Bolivia specialist at Florida International University in Miami.

International companies say they have invested some $3.5 billion in the Bolivian energy sector since the mid-1990s . . . Investors worry that they will not be able to recoup the monetary resources they plowed into Bolivian gas fields, pipeline and other infrastructure . . .

But Morales and his supporters have argued that a new way of doing business is needed, because foreign companies have plundered the national resources for decades without reducing a poverty rate topping 60 percent.

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Bolivia risk: Alert - 'Friends' are first victims of nationalist pushSUMMARYWhen Spain spearheaded a wave of foreign direct investment in Latin America in the 1990s, the logic was compelling: a common language with much of the continent, a history of close contact and a common 'latino' outlook gave Spanish banks, utilities and energy interests a comparative advantage. This they quickly turned into a portfolio of acquisitions in countries from Mexico to Chile, including Bolivia. For Brazil, the logic of investment in Bolivia was even more obvious. Brazil is a neighbour, a potential consumer of Bolivian resources and a cultural cousin in a region perennially wary of outside interference. All the more noteworthy, then, that among the first victims of the Evo Morales administration's nationalist push should be Spanish and Brazilian interests.

Grab for gas

A government decree issued on May 1st has called on large private energy investors to transfer a majority stake in their operations to YPFB, the state oil company, and to negotiate new contracts which sharply cut the share of output the companies will be allowed to keep. This highest share available to private partners will be 40%, down from a limit of 50% imposed last year. At the two largest fields, San Alberto and Sabalo (both operated by Brazil's Petrobras), the state share will rise to 82%.

The state company will take direct control of all production, refining, transport and marketing of gas, and soldiers were sent to 56 locations around the country to put this part of the decree into immediate effect.

The government has set a six-month time limit on contract renegotiations, after which those companies failing to reach agreement will be expelled. Government auditors are to calculate the appropriate level of compensation to be paid on a case-by-case basis.

Political priority

The extent of the measure, and the manner of its announcement and implementation, indicates that the government intends to honour the sharply nationalist platform on which it won power in the December 2005 elections. Mr Morales labelled the takeover of the gas operations as historic, and said it brought to an end years of "pillage" by foreign companies. He added that primary sectors, including mining, forestry and agriculture, would be subject to similar measures in future.

As well as being a campaign pledge, exerting sovereignty over the country's natural resources is also in line with the ideological leanings of Mr Morales and his political allies. However, the highly symbolic setting of the operation suggests a strong element of political grandstanding, too. The choice of the May Day holiday to make the announcement assured maximum ideological resonance, and facilitated mass public demonstrations of support. The dramatic involvement of troops characterised the move as one of confrontation with the vilified foreigners. The promises of more to come evoked a revolutionary campaign that will continue to deliver popular victories into the future.

By launching the campaign at the Palmasola refinery, Mr Morales also confronted head-on separatist forces in the wealthy eastern province of Santa Cruz, which hosts the facility--another move designed to garner support from the government's core constituency.

This focus on political message as well as economic substance underlines what may turn out to be a key vulnerability of the Morales government. Its legitimacy is based largely on its capacity to deliver the radical programme of nationalisation and wealth redistribution programme set out in its election campaign. Its supporters will demand progress on this front, but they will expect it to deliver fruits in the shape of jobs and improved standards of living. If the government is unable to deliver either one of these, support could quickly wane.

The administration's readiness to risk antagonising governments considered generally well-disposed towards it, such as the Luiz Inacio Lula da Silva administration in Brazil, underlines the constraints that its ambitious programme imposes.